Summary
As human beings, we are defined by patterns. Our collective pattern defines society. We are empowered with choices – furthering the patterns, or breaking them or creating new ones. In the physical world, these choices could be social, economic, technological, or ecological. Based on the choices we make – good, bad, or ugly, we enjoy or suffer consequences. COVID-19 escalated the macroeconomic situation leading to liquidity, demand, and supply shocks. Can we break the current pattern and embrace digitization, decentralization and sound money? In turn, making choices that will create affirmative consequences for humanity.
Patterns, Choices & Consequences
On the late evening of 5th July 2004, one of our core team members was driving on Mumbai – Pune highway in a Maruti 800, after an offsite monthly sales review in Mumbai (India). He had to be in Pune for an early morning sales leadership training program. It was getting dark and he was trying his best to get out of Mumbai traffic onto the expressway. Once he reached the expressway, he felt it would be a breeze to get to Pune. This was his usual circuit and he was cruising at about 80 km per hour (not high speed or rash driving by any standards). He was ambitious. Past midway the weather conditions suddenly changed and it started pouring with no visibility beyond two feet. He pushed the accelerator trying to overtake a bus. He hadn’t bothered to check that the tyres were worn out and there was mud sludge on the road. He was ill-prepared and complacent. This lethal combination made his car lose control, spinning and toppling and diving next to a waterlogged canal. The car was twisted like a toy, the back shield was broken, the front bonnet had rolled in like tinfoil, the right door warped in to touch his legs, his seat was broken and eyeglasses were left behind on the road at least 300 feet away. All of this literally happened in a split second in his experience. He was in shock. He could have died or been permanently disabled. Many possibilities swam across his eyes – brain hemorrhage, internal injuries, broken legs, or a broken neck. Surprisingly, he quickly came out, searched for his glasses in the dark, found them & walked to the highway to look for help to salvage the car. Yes, he was resilient to bounce back and shift attention to the car. He waved at a patrolling vehicle, which stopped and immediately asked him to leave everything behind escorting him to Pune city. It was tough to let go. They asked him to report any concussion or trauma as it could be a sign of internal injuries. Luckily, he was out with literally a drop of blood – the car was written off as a scrap – not even the engine was salvageable. He survived and thrived!
So, why start an article on macroeconomics with personal experience. In our view, life is a series of patterns, choices, and consequences.
Our current global situation is like all of us stuffed in a small car that toppled and crashed leaving us to survive.
Collectively, the economies globally were cruising at an ambitious pace, liquidity was omnipresent, we had problems like flattening growth & failing global macroeconomic balance, but who cared, we were complacent to brush them under the carpet, by pumping in good money after glossed over opportunities, calling it growth capital. It gave a sense of expansion of economic power. It was like a game of musical chairs, that would never stop! We didn’t expect weather conditions to suddenly change and our ambition had blinded us to realize that we were unprepared for a ‘pandemic’. It literally happened in a split second in our collective experience. One day we were watching the news and seeing the virus spread in Wuhan and then other provinces in China. In a few days thanks to global travel & commerce it was next door. As lockdowns started to happen across geographies, it was evident that there would be a trifecta of liquidity shock, demand shock, and supply shock leading to market break down.
Liquidity Shock – First wave
First wave of a Tsunami is not the largest wave, but the one that causes the most destruction and sets the course for subsequent waves to do widespread damage.
The last couple of months have tested humanity at every level – physically, psychologically & economically. To put things in perspective almost all the markets are still down by at least 30%. This can be best labeled as a ‘financial contagion caused by a pandemic’. Liquidity was practically vacuumized from all the markets one after the other in quick succession.
US Bond & Equity markets form the bedrock of the current global financial system. From a periodical high in 1st week of Feb 2020, these markets dropped between 25-40%.
The macroeconomic and financial impact of COVID-19 materialized in just 3 weeks compared to three years taken for the 2008 Global Financial Crisis to play out. Credit markets seized, causing spreads to blow up towards 2008 levels.
Goldman Sachs, JP Morgan, and Morgan Stanley expect US GDP to fall by an annualized rate of 6% in Q1 FY20 and by 24-30% in Q2 FY20. US Treasury Secretary warned the US that the unemployment rate could escalate to above 20% which would be twice the peak reached during the 2008 crisis.
Demand and Supply Shock – Second wave
Will this stymie economic activity?
The answer is a definite Yes. Globalization and on-tap consumption as we know have been severely impacted. The next two to three quarters will be a washout for SMEs and many sectors will take a big hit.
As the supply chain cracks, topline squeezes, expenses stay more or less as-is & credit period extends from 30 to 60 to 90 days – there will be limited experimental or innovation-related expenses. So, if a startup or service provider has a real solution that enhances the topline or reduces the cost, they will thrive.
Will this impact the adoption of Digitization and Distributed Ledger Technology (DLT) in general?
Absolutely Yes. This is the right time for DLT to rise and shine.
Light at the end of the tunnel
Every pandemic has a network effect, almost like a Youtube video going “viral”. There is always Genesis, Expansion, Ebbing, and End. Genesis happened in Wuhan district and expanded unchecked across China, then South Asia, followed by Europe and the US.
The pandemic is going to ebb soon.
As per Mckinsey, Goldman Sachs, KPMG research, WHO, and various other credible sources COVID19 has 3.7 million-plus confirmed cases, 250,000+ deaths worldwide, 210 countries impacted and 1.5 – 2x higher transmission rate compared to seasonal flu. Over 20% of patients develop severe disease with the mortality rate being high in populations above the age of 50.
Practically the entire world is under lockdown and hotspots have been identified. Over the past two months, many aspects of COVID-19 like its transmission rate, transmission mechanisms, impact on the human immune system and soft organs, herd immunity, alternate therapies, etc have been extensively studied across the globe. There are innumerable survivors now. So, while the threat is still there – it has changed from an unknown threat to a locatable known threat.
The awareness of the genesis and reasons for expansion have been understood well even by the youngest child in a family through Whatsapp, parental guidance, media, school, or peers. All governmental and social support groups have become hyperactive in spreading awareness, containing, and curing patients. With all the lockdown, social isolation, and quarantine measures in place, there is little doubt that we should be close to seeing ‘ebbing’ of COVID-19 in the coming weeks.
There may be a second or even a third wave, but with the advancements in the medical field and biotech in the last two decades, we are better placed than ever to contain the impact of a pandemic.
When ‘Ebbing’ started, markets had a relief rally. Markets will take at least 3-6 quarters if not more to bounce back or fully recover. This bounce-back will be stronger in the emerging markets as expenses will be leaner, so the bottom line will look healthier.
Let’s get to the most important question for investors.
Will this financial contagion stop?
Yes, monetary and fiscal measures by the US, EU, India, China, Japan, and many other countries have already been announced. There are stimulus packages for SMEs, Banks, exports, etc to stimulate activity where there has been most severe Demand – Supply shock.
Resilience and let go
We transported the virus across the globe & eventually it is our resilience that will dig us out of this hole.
Lockdown period gave us enough time to understand patterns that impede our progress by throwing us into unhealthy economic cycles. As human beings, we are the only creatures on our planet that have the ability to make conscious choices. If digitization, decentralized ledger technologies, and digital assets are the future, then can we accept this change as an inevitable paradigm shift, albeit one punctuated with gauntlets of chaos. Can we accept the consequences and focus on resilience to let go of the past. Let’s become part of the future. Let us engage with this new financial system and adapt to new realities. Let’s survive and thrive.
Authors: Pranav Sharma
Contributor: Ankur Dubey
Infographics: Deepa Vishwanathan
Disclaimer
The views, information, and opinions expressed are solely those of the authors in their personal capacity and do not reflect the official position or views of Woodstock. The authors have taken the utmost effort to ensure the research is up-to-date and accurate. However, no warranties or representations, express or implied, are made as to the timeliness, completeness, or accuracy of the information. Readers are advised to obtain independent professional advice before making any investment decisions or investing. Woodstock does not endorse the views expressed by the authors. Under no circumstances shall Woodstock, its affiliates, partners, directors, employees, or advisors be liable for any loss suffered by a reader on account of the views, information, and opinions expressed herein.
References:
Yahoo! Finance
ECB announces €750 billion Pandemic Emergency Purchase Programme (PEPP)
New York Fed pledges to offer $1 trillion a day in overnight repo loans
